ECONOMY: Australia's foreign debt set to grow

by News Weekly

News Weekly, April 10, 2004

Australia's net foreign debt has hit $375bn, and is set to pass the $400bn mark in 2004.

Last year, Australia ran up a further $47bn on its foreign debt, $12bn alone in the December quarter. Half this increase in the foreign debt was interest payments - interest we are paying on our foreign debt.

This means that we are paying over $20bn a year, which is interest on interest. Our foreign debt is growing under compounding interest.

Foreigners are lending to Australia because we are offering an official interest rate of 5.25%, whereas investors can only obtain 1% interest in the USA, and even less in Japan. Further, by investing short-term in Australia dollars, they gain a double advantage - a high interest rate and higher returns on a rising Australian dollar.

This demand for Australia dollars is, in turn, pushing up the value of the Australian dollar, making it harder to sell our exports, particularly our rural exports.

Who is borrowing this money? Much of it is being borrowed by Australian banks, that are lending the money to feed our property boom.

As Herald-Sun business commentator, Terry McCrann, recently wrote, this is the ultimate hot money chasing our high interest rates and rising dollar.

"When, and if, the game changes, the money will flood - even faster and in greater lumps - in exactly the opposite direction.

"And when it does, it could run in tens of billions of dollars a month. Then we have to cover not just that sort of outflow - to somehow beg, borrow (or sell off bits of the farm) from I'm not quite sure where and whom. But we then have to beg, borrow or whatever even more, to cover that underlying continuous deficit - the $12 billion a quarter, $48 billion a year ...

"That 'process of adjustment' will be some combination of a sharp and sustained lift in interest rates and a plunge in the value of the Aussie dollar. Ecstasy for some, and the agony for most everyone else."